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Overview: Thursday, October 21 (next release 2:00 p.m. on October 28)
Increased natural gas demand owing to falling temperatures this week (Wednesday-Wednesday, October 13-20) combined with higher petroleum prices to lift spot and futures gas prices dramatically. The result at the Henry Hub was a net gain on the week of $1.86 per MMBtu, or 35 percent, to $7.25. After gaining value in the past three trading days, the NYMEX futures contract for November delivery at the Henry Hub ended the week at $7.623 per MMBtu, a net increase of 77.2 cents. Natural gas in storage continues to build at a rate that could result in the highest inventories in years by the start of the traditional heating season (November 1). As of Friday, October 15, inventories were 3,223 Bcf, which is 7.4 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil rose $1.07 per barrel on the week to yesterday’s (October 20) closing price of $54.93 per barrel, or $9.47 per MMBtu.
This week’s cooler weather in the upper Midwest and Northeast heralded the upcoming heating season, and spot prices exhibited a degree of variability that is more characteristic of price movements during the peak demand period. Spot prices increased $1.11 to $2.26 per MMBtu this week, with the largest gains coming yesterday (October 20) as traders responded to rising prices for crude oil and winter energy supplies and cooler weather that lingered in key gas-consuming market areas. The Henry Hub price yesterday jumped $1.13 per MMBtu, or 18 percent, to $7.25 per MMBtu, the highest price at the Henry Hub since March 7, 2003. Yesterday’s increase followed a 47-cent per MMBtu rise at the Henry Hub the previous day, when nearly every trading location in the Lower 48 posted higher prices as the weather appeared cold enough in many areas of the country to spur space heating demand, even while temperatures in the 90s in Texas likely resulted in higher demand for electric power. The damage from Hurricane Ivan also continues to account for lower supplies, with shut-in production in the Gulf of Mexico now about 1.5 Bcf per day, according to the Minerals Management Service. Higher demand in the Northeast region resulted in gains exceeding $2 per MMBtu at most markets in the region, the largest increases in the Lower 48. The price at delivery points in New York off Transcontinental Gas Pipe Line (Transco) increased $2.10 per MMBtu from a week ago to $7.82 in trading yesterday. In the Midwest consuming markets, increases were also sizeable but more moderate than the Northeast. At Ventura, Iowa, the price for spot gas off the Northern Natural Gas pipeline system gained $1.61 per MMBtu on the week to $6.55.
At the NYMEX, the price of the futures contract for November delivery at the Henry Hub closed yesterday (October 20) at $7.623 per MMBtu, which is 77.2 cents higher than last Wednesday’s daily settlement. The near-month contract surged 50.0 cents per MMBtu yesterday, owing to a confluence of factors including rising oil prices and anticipation of higher demand with the approaching heating season. Numerous reports also cited heavy NYMEX buying owing to perceived strength in prices in the spot markets. Combined with gains of about 10 cents per MMBtu on Monday and 32 cents on Tuesday, the increase during yesterday’s trading session has resulted in a rise in the near-month contract price of 92 cents in the past three days. At $7.623 per MMBtu, the near-month contract is trading at a 20-month high. Because prices of futures contracts did not rise as much as spot market prices, the basis differential between the Henry Hub spot price and price of the near-month futures decreased to $0.37 per MMBtu after being well over a $1 for the last two weeks. The 12-month strip, or the average price for contracts over the next year, closed yesterday at just under $7.638 per MMBtu, a gain of 41.5 cents on the week.
Recent Natural Gas Market Data
Estimated working gas in underground storage was 3,223 Bcf as of October 15, which is 7.4 percent above the 5-year average inventory level for the report week, according to EIA’s Weekly Natural Gas Storage Report (See Storage Figure). The net change in inventories was 64 Bcf, compared with an 85 Bcf net change for the report week last year and a 5-year average net change of 54 Bcf. Inventories as of the report date were an estimated 221 Bcf above the 5-year average of 3,002 Bcf and 157 Bcf above last year’s level of 3,066. Inventories appear to be approaching the highest level for the upcoming heating season in years, possibly exceeding the recent high of 3,254 Bcf, recorded at the beginning of the heating season in 2001 (In 1990, stocks were 3,467 Bcf at the end of October). Seasonably mild temperatures throughout the country likely generated little weather-sensitive demand, allowing for the continuing net injections. During the report week, the weather for the country as a whole was about 3 percent colder than normal, as measured by heating degree days (HDDs) for the week ending October 16, according to the National Weather Service (See Temperature Map) (See Deviations Map). Temperatures in major consuming market areas were generally mild. For example, in the Middle Atlantic region, HDDs numbered 1 percent above normal.
Other Market Trends:
EIA Updates Brochure for Residential Natural Gas Consumers: The Energy Information Administration (EIA) has updated its brochure, Residential Natural Gas Prices: Information for Consumers, which provides basic information for consumers at the start of the 2004-2005 heating season. The brochure focuses on the supply of natural gas and what components make up the price consumers pay for natural gas. It explains the factors that influence gas prices, summarizes EIA's natural gas outlook for the coming heating season, and suggests ways for consumers to save on their natural gas bills.
Congress Passes Alaska Pipeline Proposal: Before adjourning for the elections, Congress passed legislation awarding $18 billion in Federal loan guarantees for the construction of a natural gas pipeline, which is to be built between the North Slope of Alaska and the Lower 48 States. Additionally, the legislation provides tax incentives for the pipeline and allows the permitting process to be expedited and reorganized. The 1,800-mile pipeline would allow tapping into an estimated 38 trillion cubic feet (Tcf) of recoverable reserves with a potential total of 63.5 Tcf of recoverable resources. However, before construction can be started, the three Alaska producers, ExxonMobil Corporation, BP Alaska, and ConocoPhillips Company, still have to complete their fiscal negotiations with the state of Alaska in order to win “favorable and certain terms” with tax and royalty issues. The second phase of the project, engineering and permitting, will cost about $1 billion. Once this phase is completed, it may take about 10 years before natural gas starts flowing through the pipeline.
“Smart” Drilling Prototype Has Successful Test: A U.S. Department of Energy sponsored project to develop new drilling technology has achieved a successful prototype test. The technology would enable natural gas and oil explorers to drill safer and more productive wells by using a high-speed down-hole communication system. The new tool is a drill pipe with built in telemetry that has the capability of transmitting large bits of data to the surface while the well is being drilled. As much as 1 million bits of information per second including temperature, geology, pressure, and rate of penetration can be transmitted. The tool also relays data in the other direction just as fast, allowing operators to direct the drill bit more precisely toward oil- and gas-bearing spots and away from less productive areas. During its first commercial test, about 6,400 feet of drill pipe was deployed in an Oklahoma well during 500 drilling hours. It established a high-speed data link with above-ground receivers.
Natural gas spot prices at most market locations increased more than 30 percent owing to higher crude oil prices and the prospect of higher demand with the approaching heating season. The NYMEX price for November delivery at the Henry Hub climbed about 77 cents per MMBtu to a close of $7.623 on Wednesday, October 20. As of October 15, inventories were an estimated 3,223 Bcf, which is a net increase of 64 Bcf from the previous week.
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